Are we in a Series A crunch? You bet your ass we are.

Bullpen's Duncan Davidson outlines the hows and whys of the Series A crunch

Are we in a Series A crunch? "Abso-f*cking-lutely," said Bullpen Capital's Duncan Davidson (roughly paraphrased). 

At Wednesday night’s Venture Shift, a panel of investors all unanimously agreed that no, in fact, we are not in a Series A crunch—we’re just seeing a greater proportion of seed deals, compounded by the fact that a few years ago, it was much easier to get Series A funding, whereas now the market has gotten tougher.

And then Bullpen’s Davidson took the stage and showed exactly how and why we’re in a Series A crunch.

“It’s not a crunch, it’s a cliff, and a bunch of companies are about to fall off,” said Davidson as he showed a slide revealing flat-lining Series A deals and skyrocketing seed deals.

Indeed, Bullpen actually got its start as a preemptive strike against the looming Series A crunch. Bullpen Capital is an early stage venture fund that plants itself somewhere between the seed and Series A stages. Bullpen invests follow-on seed funding to startups that have been primarily funded by super angels. The fact is that startups can do a lot more with a lot less cash, which means they often need smaller rounds than traditional venture firms like to give. The smaller round gives the startup more leeway to get their model right and validate their business before they go and raise another round at a higher valuation.

Davidson traced the start of the crunch back to the Facebook IPO—aka “Faceplant.” The Facebook IPO flop led into “FOMO [Fear of Missing Out] chills,” which prompted many a VC to pull up on the Series A reins by Q4 2012. By Q1 2013, the Facebook IPO was rippling down to seed investors, and accelerators like Y Combinator began cutting down their class sizes as well as the amount invested per company. Now, in Q2 2013, “we’re at the tail end of the train wreck,” said Davidson.

Down rounds spiked after Facebook while up rounds plunged.

What does all of this mean? Between Q3 2011 and Q4 2012, there were approximately 2283 seed deals. Of those startups who were able to raise seed funding, some 1000 to 1500 will become “orphaned”—they will not go on to raise a Series A round. In other words, more than half of all startups that raised seed funding in 2012 will fall to the floor.

The good news is that venture returns are improving. That means increased liquidity. But—uh oh, more bad news: another tech bubble is forming, as evidenced by the widening spread between the NDX and the S&P 500, and their volatility indices.

In other words, according to Davidson: “We’re in ’97 going into ’98, so hold onto your wallets, because it should be a fun ride.”